Chapter 12

Allowable Deductions
For Individuals and Corporations
Engaged in Business / Individuals
in the Exercise of Profession
What are Allowable Deductions

Amounts allowed by the Tax Code to

be deducted from gross income to
arrive at the taxable income for
purposes of computing the income tax
liability.
Any deductions not availed within the
year can no longer be deducted from
the income of the succeeding year.
Two Types of Allowable
Deductions
Optional Standard Deduction
in lieu of itemized deductions and is a standard
deduction in an amount not exceeding 40% of gross
sales or gross receipts

- For individuals on accrual basis of accounting:

OSD to be based on Gross Sales

- For individuals on cash basis of accounting:

OSD to be based on Gross Receipts

Note: Cost of Sales or Cost of Services are not allowed to be

deducted for purposes of determining basis of OSD
Two Types of Allowable Deductions

Itemized Deductions
- any expenses that may be
specifically identified related to business,
trade or practice of profession that may be
deducted from gross income to arrive at
taxable income
Itemized Deductions

1) Expenses
- all ordinary and necessary trade,
business or professional expenses
- Expenses allowable to private institutions
- Directly attributable to the development,
management, operation and or conduct of
trade or business
- Bribes, kickbacks and others of similar
nature may not be allowed as deduction
Expenses
Compensation Cost of materials
payments and supplies
Fringe Benefits Cost of expenses
Travel Expenses of a regular
Rentals banking unit
Additional
Entertainment,
deduction to a
Amusement and
private educational
Recreation
institution
Expenses
Expenses
Rentals payments required to be made
as a condition to the continued use or
possession for the purpose of trade, to
which the taxpayer has not taken title to
+ any taxes paid by lessee
Entertainment, Amusement and
Recreation representation expenses or
rental relating to entertainment facilities
Not Considered as EAR
Fringe benefits
Expenses for charitable or fund raising
events
Expenses for bonafide meetings of
stockholders or directors
Expenses for sponsoring an employee to a
business league or professional organization
Expenses for events organized for
promotion, marketing and advertising,
including concerts, conferences, seminars,
workshops
Requisites for Deductibility of EAR

It must be paid or incurred within the

year
It must be directly connected to the
development, management and
operation of the trade, business or
profession
It must not be contrary to law, morals,
good customs, public policy of public
order
Requisites for Deductibility of EAR
It must not be paid directly of
indirectly to a government employee
or official as a bribe, kickback or other
similar payment
Substantiated by appropriate proof,
OR, bills or statements of accounts
The appropriate amount of
withholding tax, if applicable, should
have been withheld therefrom and
paid to the BIR
Ceiling of EAR

Equivalent to actual EAR but not to

exceed 0.50% of net sales (gross
sales less sales returns and
allowances) for taxpayers engaged
in sale of goods and properties
1% of net revenues (gross revenues
less discounts) for taxpayers
engaged in sale of services
Expenses

Repairs are expenditures to restore

assets to good operating condition
upon breakdown by replacing broken
parts
- capitalized repairs material
replacement of parts involving large
sums of money that extend the life of
the asset ; debited to corresponding
allowance for depreciation
Expenses

Cost of materials and supplies

maybe deducted based on:
- Actual consumption - if physical
inventory is taken at year-end
- Total purchases - if no record of
consumption is kept or no physical
inventories is taken
Expenses

Cost of expenses of a regular

banking unit (RBU)
- only costs and expenses
attributable to the operation of the
RBU
- FCDU expenses are not allowed
as a deduction
Expenses

Additional deduction to a private

educational institution
- business expenses allowable as a
deductions
- capital outlays of depreciable
assets incurred during the taxable
year for the expansion of facilities
Expenses
Corporations engaged in farming
- cost of ordinary tools of short life or
small cost
- Cost of feeding and raising livestock
representing actual outlay but not including
the value of farm products grown upon the
farm
- Cost of gasoline or fuel, repairs and
upkeep of transportation equipment
Expenses not deductible from gross
income of farmers
Treated as capital expenditures and may
be subject to depreciation:
- cost of farm machinery and equipment
- Amounts expended in purchasing work,
breeding or work animals
- Cost of gasoline, fuel or repairs and
upkeep of transportation equipment used
for pleasure or convenience of the farmer
and his family
Expenses
Deductions under the Expanded Senior
Citizens Act of 2010
- equivalent to 20% for purchase of goods and
services for the exclusive use and enjoyment or
availment of the senior citizen, such as:
-Medicines
-Professional fees of attending physicians in private
hospitals / and licensed health workers
- Medical, dental, diagnostic and lab fees
- Actual fare for transportation in PUJs / taxis, etc
- Actual fare for domestic or air transport services and
shipping vessels
Deductions under the Expanded
Senior Citizens Act of 2010
- Services in hotels and similar lodging
establishments, restaurants and recreation
centers
- Admission fees charged by theaters,
cinema houses, concert halls
- funeral and burial services for senior
citizens
the above discounts granted as tax deductions from
gross income for the same taxable year that the discount is
granted
private establishments employing senior citizens are
entitled to additional deduction from their gross income of
15% of total amount of salaries and wages paid to senior
citizens
Expenses
Deductions under the Magna Carta
for persons with disability under RA
9442
- refers to individuals suffering from
restriction or different abilities as a result of
mental, physical or sensory impairment to
perform an activity in a manner or within
the range considered normal for human
being
Prohibition on the Availment of
Discount
if the person with disability claims a
higher discount as may be granted by
the commercial establishment
If it is given in combination with other
discount programs

- a person with disability can claim only

for one discount of 20% even if he is also a
senior citizen
2- Interest
Payment for the forbearance or
detention of money; amount paid for
the borrowers use of money
Requisites:
there must be an indebtedness
there must be an interest expense paid
must be that of the taxpayer
connected with the taxpayers trade or business
incurred during the year, in writing and legally due
interest must not be for petroleum operation
not treated as a capital expenditure
Interest
Interest on unpaid taxes shall be fully
deductible, considered as interest on
indebtedness
At the option of the taxpayer interest
expense on capital expenditure may be
allowed in full in the year incurred or may
be amortized over a certain period
Any reversal shall be subject to the tax
benefit rule
3. Taxes
General rule: all taxes, local and national
in connection with the taxpayers trade or
business are deductible from gross
income, except:
- Philippine income tax
- Income taxes imposed by authority of
a foreign country
- Estate and donors taxes
- Taxes assessed against local
benefits to increase the value of the
property assessed
Taxes

When refunded or credited, it shall be

included as part of gross income of
the year of receipt to the extent of the
income tax benefit of said deduction
Non-resident alien individual or a
resident foreign corporation shall be
allowed the deduction only if they are
connected with income from sources
within the Philippines
4. Losses
Any losses arising from fire, storms,
shipwreck, robbery or theft incurred in
connection with trade , business or
profession actually sustained during the
taxable year and not compensated by
insurance, shall be allowed as deductions
With declaration of loss during the
taxable year in not less than 30 days or not
more than 90 days from discovery of such
loss
Deductibility of losses
actually used in the business enterprise
that were damaged and reported as losses
in the appropriate declaration form
Said properties may have been properly
reported as part of the taxpayers assets
Amount of loss covered by insurance claim
shall not be reported as a loss
Deduction of assets as capital losses must
be properly recorded in accounting reports
Net book value shall be used, reduced by
insurance claims
NOLCO

The excess of allowable deduction

deductions over gross income (net
operating loss) of the business or
enterprise for any taxable year which
has not been previously offset as a
deduction from gross income, maybe
carried over as a deduction for the
next 3 consecutive years